In volatile markets, it’s easy for you, as a long term investor, to fall prey to your fears and end up making an emotional decision about your money. It’s not uncommon for investors to move their money to cash or switch to a more conservative asset allocation.

However, these moves may be counterproductive. Historically, many investors who moved out of stocks during down markets didn’t fare as well as those who stayed the course, as they often missed out on subsequent rallies.

“Periods of market volatility may be some of the most challenging for investors,” says Malwal. “Yet if you look back at 2020, or 2008, or other big market corrections, stocks eventually recovered and went on to make new all-time highs. Investors who stayed invested through the downturn were more likely to fully participate in the recoveries than those who shied away from stocks after the decline.”³

Sticking to your plan and staying invested can be advantageous even when things seem dire. For instance, missing just the 5 best days in the market between 1980 and 2022 could have reduced portfolio returns by as much as 38%.⁴ This can be easier said than done, however. Thankfully, there are some steps you can take to help yourself weather the emotional and financial stress that comes with challenging market conditions. You can:

✓ Learn about common investing biases and how to combat them so you don’t overreact in periods of volatility.
✓ Explore defensive investing, which may help protect your portfolio from steep market declines (at the expense of some potential returns). A defensive portfolio may seek to include more conservative stock investments, high-quality bonds, and alternative investments that are less correlated to the performance of traditional asset classes.
✓ Consider developing a steady stream of reliable income that isn’t dependent on market-based sources (e.g., bonds, dividends, or fixed income annuities), so you aren’t stressed about covering your necessary expenses and can better weather near-term volatility.

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